SAP quietly prevails over Silicon Valley's leading players

The German software provider generates higher revenues after moving to the cloud.

Some corners of the tech world are more glamorous than others. Amazon, Microsoft, and Alphabet are leading industry revolutions , from cloud services to artificial intelligence . But it's worthy but boring software providers like SAP that are stealing investors' hearts.

Just consider that, with a valuation of €320 billion, the German provider of software for automating administrative functions is the most valuable company in Europe . Its shares have risen nearly 50% in the past 12 months, valuing the group at 42 times its expected earnings this year, according to Bloomberg estimates. That's more than double the valuation of Alphabet, the owner of Google, two-thirds higher than that of Meta Platforms, and a considerable premium to Amazon.

SAP and its peers have undergone a quiet revolution. Times have changed since their business consisted of supplying heavy disks to IT departments and extracting a license fee for their troubles.

Instead, software has been migrating to the cloud. Around 80% of SAP customers' operations are run on infrastructure managed by so-called hyperscalers, as the large cloud providers are known. Last month, SAP renewed its partnership with Chinese cloud provider Alibaba ; Workday has expanded its agreements with Google Cloud Marketplace and Amazon Web Services.

While this is good for hyperscalers, software vendors will also benefit from higher revenues and much greater returns from the move to the cloud. The increased revenue is due to the ability to sell customers new products and quickly update existing ones. AI can be incorporated more easily; SAP Analytics Cloud , for example, adds planning and insight. SAP aims to have more than 400 AI tools by the end of the year.

Meanwhile, relying on hyperscalers allows software providers to free themselves from the heavy investment required to build and upgrade data centers, not to mention the running costs of an energy-intensive operation. SAP, for example, has increased its return on average invested capital from 8.4% in 2020 to 10% last year; consensus figures predict 14.6% by 2027, according to Visible Alpha.

There's potential for turf wars, as cloud operators have specialized in developing AI tools and, in some cases, enterprise applications, blurring the line between infrastructure and software. Consider Oracle , straddling the two; the US group expects its cloud computing contract portfolio to more than double next year.

These concerns aren't enough to scare investors. SAP's profits are expected to grow at a compounded rate of 22% annually through 2028, according to S&P Capital IQ estimates. In an increasingly adventurous tech sector, even boring companies can become runaway successes.

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